Oil marks first-ever close above $61

Storms fuel supply worries ahead of Thursday's data

SAN FRANCISCO (MarketWatch) -- Crude-oil futures marked their first-ever close above $61 a barrel Wednesday as severe weather shut down several oil and gas rigs in the Gulf of Mexico, intensifying anxiety over whether U.S. inventories are adequate in the short run to meet strong demand.

Tropical Storm Cindy forced the shut-in of 12.7% of daily oil production, representing 190,506 barrels, in the Gulf of Mexico, the U.S. Minerals Management Service said Wednesday. See the latest update.

"The market would be able to justify the lost production if there was hope we could get right back to normal, but with Tropical Storm Dennis on the radar, we won't get back to normal," said Phil Flynn, a senior analyst at Alaron Trading.

Tropical Storm Dennis, which is currently churning away in the Caribbean, has the potential to become "the first significantly dangerous storm of the season," John Kilduff, an analyst at Fimat USA said in a note to clients.

Against this backdrop, crude for August delivery climbed as high as $61.35 a barrel on the New York Mercantile Exchange before closing at $61.28 a barrel, up $1.69, or 2.8%.

Prices surpassed the previous record of $60.95 on June 27. They're up around 70% from a year ago and up 44% year to date.

The "frequency of these storms" has frightened the market, Flynn said, adding that "we've never had this many this early in the season." The season started just last month and runs through November.

This "could indicate that we're going to have a very active hurricane season that could last throughout the summer," Flynn said.

Petroleum-product prices also gained ground, with the August contracts ending in record territory. August heating oil climbed 6.24 cents, or 3.6%, to close at $1.7948 a gallon. August unleaded gas tacked on 10.97 cents, or 6.5%, to end at $1.7915 a gallon.

The storm path for Dennis as projected by forecasters will take it over some key oil and natural-gas fields in the coastal waters off Louisiana, Mississippi and Alabama, according to Kilduff.

Traders still remember the impact of Hurricane Ivan late last year, which ultimately gave rise to the shut-in of a total of 43.8 million barrels of oil production -- fully 7.25% of the region's yearly production, according to Agbeli Ameko, managing partner at First Enercast Financial.

Supply threat

All in all, the "hurricane threat has certainly raised ... fears of refiners struggling to produce enough products, particularly at a time when demand for gasoline is extraordinarily high," Kilduff said.

Reports on U.S. petroleum supplies for the week ended July 1 will be released by the Energy Department and the American Petroleum Institute on Thursday, a day late this week due to Independence Day.

The separate reports "could ... produce additional upside momentum if unexpectedly large drawdowns are reported in any category," Kilduff said.

Then again, "the intense focus on the weather may set the stage for a bearish reaction to Thursday's DOE report," said Tim Evans, a senior analyst at IFR Markets. He believes the U.S. supply data will "fail to confirm the demand squeeze already priced into the price appreciation over the last week."

Estimates generally call for a decline in crude supplies, with IFR Markets betting on a contraction of 1 million to 2 million barrels, while Alaron Trading's looking for a decrease on the higher end of that range. Fimat expects inventories to come in lower by 300,000 barrels.

IFR expects distillate stocks, which include heating oil and diesel fuel, to have climbed between 1 million and 2 million barrels last week, and Fimat sees a smaller 600,000-barrel buildup. In contrast, Alaron sees a 2 million-barrel decline.

Driving gasoline higher

Of particular concern are supplies of motor gasoline during the high-demand summer season.

Gasoline supplies likely fell 3 million barrels, according to Alaron. IFR's estimate was a bit more conservative, calling for a decline of no more than 1 million barrels, while Fimat's looking for a 1.1 million-barrel increase.

"Early reports that Fourth of July consumption of gasoline and jet fuel product will reflect a massive drawdown in supplies," said John Person, president of National Futures Advisory Service.

Added to that, the weather in the Gulf "puts the nation's center-most area of refineries in jeopardy," he said, causing shutdowns that will "lead to further tightness in supplies."

The average price for a gallon of regular unleaded gas stood at $2.222 on Wednesday -- nearly unchanged from the previous day but close to the all-time high of $2.276 set back on April 11, according to AAA's Daily Fuel Gauge Report. See more data.

Natural gas at two-week high

Also on Nymex, natural-gas prices closed at their highest level in two weeks, finding continued support from the threat of output disruptions in the Gulf.

August natural gas closed up 21.3 cents at $7.688 per million British thermal units after moving all the way up to a $7.70 high.

But "moderating temperatures in the Northeast and ample and building supplies should keep a lid on prices, unless Dennis spins into a Category 4 or 5 [hurricane]," said Kilduff.

As of Wednesday, Cindy forced the shut-in of 7.5% of daily gas production, or 753 million cubic feet, in the Gulf, according to the MMS.

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